Published 4:00 am, Monday, December 9, 2002

So, while SFO officials talk confidentially about their mega-tenant rising from a threatening bankruptcy as a "stronger company," they're also reassured that -- if United nose-dives -- San Francisco's draw as a tourism mecca and international gateway will shield the airport from financial fallout.

"In the worst case -- if United goes away -- people still want to come to San Francisco," said SFO spokesman Mike McCarron. "It's basic economics: There's demand, so someone is going to meet that supply."

While McCarron wouldn't identify competing airlines hungrily eyeing United's SFO gates and routes, he said: "We have been getting inquiries about that from several airlines across the board." That includes both mainline domestic carriers (Continental's chief Gordon Bethune has publicly coveted United hub operations at SFO and elsewhere), no-frills airlines and international competitors.

Despite agreement that the Bay Area's business and tourism attractions are helpful buffers, credit-rating services have placed SFO on a negative ratings watch because the airport faces the triple-whammy of a troubled major tenant and a travel-slashing economic slump, while shouldering $4.3 billion in debt from major expansion projects like the new international terminal.

'WELL-RUN AIRPORT'

"It's a well-run airport, and they've done a good job of recovering from Sept. 11," said Kurt Forsgren, a transportation analyst with Standard & Poor's.

"It's just that they've been at the confluence of a number of events that, because of their cost and debt structure, have really weakened their financial position."

On Tuesday, S&P issued a negative credit outlook for SFO and reaffirmed a lower A rating issued in February, saying the airport "has limited flexibility to handle further service level disruptions by United." Fitch Ratings also issued a negative watch, citing a 20 percent drop in SFO passenger traffic, its vulnerability to the United bankruptcy and "significantly increased fixed costs."

"We're kind of waiting to see what United does in terms of scale back in operations and how that may affect the revenues that flow through to the airport," said Forsgren.

These concerns reflect SFO's heavy dependence on United, which accounts for an estimated 51 percent of its passengers and 27 percent ($113 million) of annual revenue. That breaks down to United's paying $63.3 million in terminal rents, $45.1 million in landing fees and $4.6 million in rent for its big SFO maintenance center.

BORROWING POWER KEY ISSUE

The airport could see a drop in revenues and passengers if -- as is expected -- bankruptcy forces United to make deeper cuts in staffing, equipment and flights. And if credit services further reduce the airport's ratings, it would become harder for SFO to borrow money, a key worry for an agency that's earmarked more than half its 2002-2003 fiscal year finances to service its outstanding debt.

McCarron said the airport was well prepared. For example, the airport secured a $24 million performance bond from United that is bankruptcy-proof and will cover two months of rents and fees in the event the airline pulls out.

The airport has also cut its budget 5.6 percent to $570.4 million and reduced staffing 15 percent to 1,306 employees through attrition.

"We have a couple financial guys who keep very close tabs on this," McCarron said.

HOW MUCH WILL OTHERS STEP UP?

However, analysts say, the big question is how much other airlines can fill the void of a weakened United, when the aviation industry is struggling worldwide.

"Whenever you have a good strong market like San Francisco is, in terms of desirability there is going to be a certain amount of pickup of passengers who,

if they don't fly on United, they're going to fly on someone else," Forsgren said. "That's probably tempered a little bit by the fact that most airlines are not in a position where they can necessarily fill that void entirely. They may not have the equipment or the resources to just automatically switch flights from one market to another."

Other carriers would love to snatch up United's profitable international routes, but the airline will not want to part with them.

And while low-cost Southwest Airlines is the rare niche carrier that's kept soaring during the economic hard times, it abandoned SFO early last year, fed up with the impact of repeated weather delays on its schedules.

"I think it would be unusual for Southwest to start serving San Francisco again," Forsgren said. "They like low-cost airports, and they like their frequency (of flights)."

All this means that SFO could find itself losing income needed to pay off its billion-dollar debt. And because airports mostly charge airlines based on their level of operations, other tenants could see their share of the airport's overhead increase.

"To the extent that United has reduced operations and reduced passengers, it has the net effect of increasing the costs on everyone else," Forsgren warned.